Since the growing use of corn to make ethanol has driven up prices of many farm-made and -raised commodities, fuel for automobiles and fuel for human sustenance have never been so closely linked as they are today.
That issue prompted the National Restaurant Association in June to send a letter to the U.S. Senate requesting that it consider the unintended consequences of increased mandates for renewable fuels like ethanol, particularly in the form of higher food costs.
Michelle Reinke, director of legislative affairs for the NRA, says that despite efforts by the association and other food and agricultural groups, the Senate passed H.R. 6, the CLEAN Energy Act of 2007, in June by a vote of 65-27.
The energy bill—with CLEAN standing for “creating long-term energy alternatives for the nation”—includes a provision to increase the renewable fuel standard to an annual goal of 36 billion gallons by 2022, from the current 7.5 billion gallon mandate.
According to the U.S. Department of Agriculture, ethanol production in this country climbed to almost 5 billion gallons in 2006, up nearly 1 billion gallons from 2005. Production is expected to top 10 billion gallons by 2009.
President Bush, seeking to lessen the nation’s dependency on expensive foreign oil, has proposed using renewable fuels to reduce gasoline consumption by 20 percent in 10 years. Crude oil prices averaged less than $20 a barrel in the 1990s, but very recently closed above $80 for the first time.
Such energy policies and bio-fuel programs have provided multiple economic incentives for an expansion of U.S. ethanol production. In addition, the federal tax code also provides incentives for biofuels: Current laws allow blenders to receive tax credits equal to 51 cents per gallon of ethanol blended with gasoline.
Also, the 2005 Energy Bill asked refiners to stop using MTBE, a fuel additive found to contaminate the water supply, and that in turn began a trend to replace MTBE with ethanol, furthering the demand for the corn derivative.
Ethanol, otherwise known as grain alcohol, is blended with gasoline to improve its oxygen content in volume levels ranging from 2 percent to 10 percent.
For years there has been significant debate about the merits of ethanol, particularly since it cannot be shipped via pipeline like conventional gasoline but instead must be shipped by truck or rail. Furthermore, many scientists say that even if all corn went into ethanol production, less than 10 percent of U.S. liquid fuel requirements would be fulfilled.
Still, corn-based ethanol is at the leading edge of U.S. renewable fuel production, and much of the increase in the mandated production of renewable fuels will continue to be met by corn.
Alternative technologies exist, such as making cellulosic ethanol from nonfood and nonfeed sources such as wood chips and switch-grass. However, further advancement and research over many years would be needed before they become viable, industry experts say.
Corn is the major crop produced in the United States, and the increased demand on corn supplies from ethanol has pushed prices to record highs. Corn has increased by approximately $1.50 per bushel since the approximately $2-per-bushel level of mid-2006. The price of soybeans also has been rising as acreage once devoted to that commodity has been used for corn.
Until recently, the vast majority of the corn grown in this country had been used to make feed for poultry, cattle, and swine. In 2006, corn accounted for about 25 percent of the total planted U.S. acreage of 315.8 million acres.
But now, with ethanol driving corn prices higher, many farmers have switched from other crops to corn. That trend has impacted the price and availability of those other crops, particularly soybeans—a critical crop for restaurants looking for trans-fat-free oil alternatives to replace products containing trans-fats. The USDA now forecasts that corn production this year will be 26 percent higher than the 2006 yield, while soybean crops will decline by 18 percent from last year’s record high.
Reinke says that even without the energy bill’s impact, restaurants already face a shortfall of about 4 billion of the estimated 8 billion pounds of oils needed to meet increased demand for trans-fat-free products.
“Crops such as soybeans, canola, sunflower and others are used to produce these oils and already are in short supply because the incentives are not there for farmers to produce these crops, especially when corn prices are so high,” she says.
Commodities analyst John T. Barone, president of Market Vision Inc. in Fairfield, N.J, says that between the industry’s shift away from artificial trans fats and the growing worldwide demand for biofuels, demand for vegetable oil is going through the roof.
The dairy industry is feeling the impact. While the rising price of milk and cheese are due in part to strong global demand and rising consumption, federal officials also have linked the dairy spike to to the growing production of corn-based ethanol.
Milk is hovering at $4 a gallon in most cities, and the price of cheese has risen more than 50 percent this year. Those increases have prompted several large pizza chains to raise prices, including Pizza Hut and Papa John’s Pizza.
Domino’s Pizza so far has held the line on pricing but said recently that it could be forced to make increases if the prices of cheese and other items continue to rise.
The benchmark price of block Cheddar cheese recently reached $2.08 a pound, a 78-percent increase over year-ago levels, but the price has been moderating, falling to the mid-$1.80s in August and trending downward.
Still, agriculture advocates are being no less vigilant about the perceived threat posed by ethanol.
American Meat Institute spokeswoman Janet Riley says the group is absolutely opposed to more ethanol mandates and will continue to lobby against them.
The institute’s president and chief executive, J. Patrick Boyle, in April submitted testimony to a House subcommittee that cited the dramatically increased demand for corn, and the ways it had resulted in higher feed prices. As a result, he indicated, animal producers were considering alternatives to their feeding, nutrition, and dietary regimens that in turn could impact consumer offerings, farm efficiency and management.
Boyle urged Congress to take actions to mitigate the impact of dramatically increased corn demand, noting that doing so would “ultimately place the United States in a more competitive position in terms of energy security, diversity and availability.”
The management of Raleigh, N.C.’s landmark Angus Barn restaurant is watching the beef market closely. The 500-plus-seat restaurant’s size gives it strong buying power as an independent and allows it to buy directly from a major beef producer, according to controller Bob Lyford. But he says the restaurant has not yet seen a significant rise in prices, though such a spike is anticipated.
“We don’t know when it will be, but we do expect it,” Lyford says. “If prices do increase substantially, our only option will be to pass it along to guests.”
Richard Lobb, director of communications for the National Chicken Council in Washington, says the 27 percent of this year’s corn crop that will go to ethanol production is hurting the poultry industry, which ranks second only to the cattle industry as a purchaser of corn.
Lobb says that because it only takes about 10 weeks to bring a chicken to market—as opposed to two to three years for a steer—the poultry industry has been the most immediately impacted by the 44-percent increase in feed costs in the past year.
The Tampa, Fla.-based Beef ‘O’ Brady’s chain says the impact of ethanol production has affected many commodities in its business, with the biggest change being a doubling of poultry prices in the last year. Cheese and dairy are escalating above any forecasts, too, says Scott Taylor, Beef ‘O’ Brady’s senior vice president of development. Chicken wings are a signature item at the chain, and it is working on ways to introduce new products to offset the impact of higher prices, he explains.
“We are trying also to address the issue with pricing,” says Taylor. “Our concern is to remain a strong value to our loyal customers, so we are not looking to pass on the entire cost but rather to continue to develop new offerings.”
Lobb of the Chicken Council put it like this: “This year’s corn crop is said to be the largest since 1945. We are on a collision course with the people who buy corn because Congress has put its thumb on these targets.”
Moreover, he adds with a note of irony, ethanol itself is not very efficient. Though gasoline is transported by pipeline, ethanol has to be transported by truck or rail, “so it costs money and causes more air pollution because the adding of ethanol has to be [done] close to the point of sale,” he observes.
Pork producers also are concerned about ethanol.
David Warner of the National Pork Producers Council says the industry continues to be concerned about the rapid growth of the corn-based ethanol industry. Pork producers have seen a 30-percent increase in production input costs, about 75 percent of which are for feed, including corn and soybeans. “More than price, the industry is concerned about corn availability,” he says. “In some areas of the country, ethanol plants are buying all the corn.”
Cal Dooley, president and chief executive of the Grocery Manufacturers Association, predicts that an overambitious increase in the use of ethanol, including current and proposed mandates, will likely result in higher food prices domestically and across the globe and a plethora of other negatives. Those, he says, would include a decrease in corn exports, increased use of marginal lands, more environmental degradation, higher ozone levels and public health risks, increased world hunger, and a $50 billion cost to U.S. taxpayers.
Like the NRA, Dooley’s association has asked Congress to evaluate the full impact—including unintended consequences—of expanding the use of biofuels.
A University of Iowa study in May gave what it said was a conservative estimate that U.S. consumers already have seen an increase in retail food prices amounting to $47 per person as a result of the rise in corn prices, equating to a $14 billion increase in food prices nationally.
The study says that if the long-run corn prices were to increase to $4.42 per bushel, under a high-price crude oil scenario, retail food prices for beef, pork and poultry would increase by 6.8 percent, 7.5 percent and 8.5 percent, respectively. Egg prices would jump 13.5 percent. Under such a scenario, with U.S. food expenditures totaling $1.1 trillion, the total food price impact of corn-based ethanol would equate to about $20 billion annually for American consumers. Not included in those costs would be indirect costs, such as demand for higher wages due to an overall cost of living increase.
In a special report, Paul C. Westcott of the USDA said that the ethanol boom most likely will mean higher food prices for consumers for years to come and that retail price increases for red meats, poultry and eggs would exceed the general inflation rate in 2008 through 2010 as the livestock sector adjusts to higher feed costs.
But not everyone agrees that corn for ethanol is the cause of higher commodity prices.
In a statement issued in July, Tom Slunecka, executive director of the Ethanol Promotion and Information Council, said, “The ethanol industry has become a convenient scapegoat for corporate America to justify price increases to maintain profits.”
John M. Urbanchuk, director at the consulting firm LECG LLC in Emeryville, Calif, gave a nod to that sentiment in a recent report saying the critiques of renewable fuels are unwarranted.
“They fail to point out that corn prices are only one of many factors that determine the CPI for food, and in fact, directly affect a small share of retail food prices,” he wrote.
Those analyses notwithstanding, the restaurant industry seems to be feeling the pinch.
David Abes, director of operations for Here to Serve Restaurants in Atlanta, says menu pricing is definitely a hot-button issue right now. The company, which has eight restaurants around Atlanta, has not yet raised its prices. “We have really relied on our chefs to run a tighter ship,” he says. “After 9/11 we had to think smarter and be better operators, and we still do. If things aren’t changed soon, however, we might have to extend it to our guests.”
The Pittsburgh-based Eat’n Park chain also has seen major increases in its food costs that it attributes to increases in feed and ethanol production costs.
But despite food cost increases of 6 percent to 8 percent in the last year alone, Jamie Moore, director of sourcing and sustainability, says that Eat’n Park is not ready to switch to the alternative—grass-fed beef.
“I would say the cost of grass-fed beef is quite a bit more than the conventionally fed beef, so my answer right now would be no,” Moore says. “And I don’t think the consumers within our restaurants are ready for it either. Frankly, the taste is different.”
Officials of Dublin, Ohio-based Wendy’s International Inc. declined to comment on ethanol-related cost spikes, citing an upcoming discussion about commodity prices it may have in connection with its third-quarter earnings report in early October. But spokesman Bob Bertini said Wendy’s has seen no effect on supplies of its trans-fat-free cooking oil.
At Atlanta-based Hooters of America, the rising cost of corn has caused the chain to alter its methods. Joe Hummel, vice president of operations and purchasing, says: “It has become too expensive to keep high inventory levels of cheese on hand. Our simplified menu has allowed us to mainstream our ordering process and manage and offset the rising commodities of cheese. However, this did not impact our decision to convert to a zero-trans-fat soybean-based cooking oil.”
Maryville, Tenn.-based Ruby Tuesday, has not increased menu prices based specifically on product cost but instead makes periodic adjustments based on various factors. However, senior vice president Rick Johnson says corn-toethanol conversion appears to be one to watch. “Non-trans-fat oils seem broadly available, but nearly all cooking oils are currently more costly than they previously were,” Johnson says.
Lebanon, Tenn.-based Cracker Barrel Old Country Store is watching the situation closely, spokeswoman Julie Davis says. “We can’t speculate publicly on what will happen with commodity prices, but we will continue to enter into commodity contracts as appropriate,” she says.
Reinke of the NRA says that with energy legislation before the House preceding Congress’ August recess, the association was successful in blocking an amendment aimed at increasing the renewable-fuel standard. However, the House is again expected to address energy legislation this fall.
“We will continue to educate lawmakers about the unintended consequences of rapidly increasing such a mandate and the need to develop renewable energy sources from nonfood and nonfeed sources such as cellulosic ethanol in some cases,” she says. “We’ll continue to ask them to pass energy policies that minimize the distortions in the food market.”